Going to Jail for Having A Bank Account

Go to Jail. If you have a bank account with more than $10,000 outside the country and have not reported it to the US government every year, you could go to jail for five to ten years and pay fines from $100,000 to $500,000.

End of Swiss Bank Privacy? The IRS recently announced that the US government has worked out an arrangement where the IRS will receive the names of US citizens who have not reported their Swiss bank accounts to the IRS. There were media reports that the IRS sought information on 52,000 accounts, however, a recent settlement calls for UBS to give the IRS between 4,500 and 5,000 names. Once the IRS has these names, the IRS can then initiate criminal prosecutions for tax evasion. Several US citizens with UBS accounts have recently pleaded guilty of not reporting foreign bank accounts, with their information being posted on the IRS website.

Grandmother Lee. Grandmother Lee fled Vietnam when the North Vietnamese Communist government took over South Vietnam and she settled in France. In 2006, she died and left her money equally to her three children in her bank account in France. Dr. Lee, one of her daughters, is a US citizen living in Virginia and is a medical doctor. In 2006, Dr. Mae Lee found out that she had inherited $80,000 in a savings account in a French bank from her mother. Dr. Lee left the money in France, thinking that when she had time from her busy medical practice, her family would have a great vacation in France. The first time Dr. Lee received a statement of the interest income from this French Bank account was in 2008. Dr. Lee filed a personal tax return for 2008 reporting the interest income from the French Bank account. The IRS examines the return and started a criminal investigation of Dr. Lee for failing to timely file Form TD F 90-22.1, Report of Foreign Bank and Financial Account, commonly known as a FBAR, for three years.

Who Has to FBAR: 1.) Any US citizen or a US resident or certain persons doing business in the US or domestic trusts, corporations or partnerships AND
2.) This person had signature authority over a foreign account with a bank or foreign financial institution AND
3.) The foreign financial account had a combined value of more than $10,000. Of course, as with all tax regulations, there are many broad definitions and a lack of clarity on many points. If you want more detail, contact us for a confidential consultation. This short B-LAW-G can not be relied upond for legal or tax advise.

How to FBAR: File an annual TD F 90-22.1 by June 30, 2009 to a designated address in Detroit. You report the maximum value of the account during the year, the type of account, the name of the financial institution and its address and the account number. This form is not filed with your tax return. As a US citizen, you have to report your worldwide income on your regular 1040 personal tax return. Use Schedule B to inform the IRS of the existence of a foreign bank account. Even if you reported the income on your personal 1040 return, you would still be in trouble if you did not file the separate TD F 90-22.1 (FBAR form).

Penalties. If you fail to file the FBAR form, you can be subject to severe civil or criminal penalties or both. A non willful violation is subject to a $10,000 fine. The civil penalty is limited to the greater of $25,000 or the balance in the account up to $100,000. So for Dr. Lee, her penalty could be $80,000 and she forfeits the entire $80,000 she inherited. The IRS has six years to assess the FBAR penalty. Criminal violations can result in a fine of up to $250,000 and 5 years in jail. Where the failure to file the FBAR is part of tax evasion, the fine may go as high as $500,000 and up to ten years in prison.

Collapsing Offshore Tax Shelters. In the past, prosecutions have been rare. But with the step up in enforcement against offshore tax evasion, prosecutions may increase. For people who are not part of a tax evasion scheme and only recently realized they need to file FBAR reports, the IRS has a temporary voluntary disclosure program.

Saving Dr. Lee. Dr. Lee had no idea that she was committing a crime because she inherited money in 2006 in the form of an account in France from her departed mother. She could be subject to a civil fine of $80,000 and a possible criminal tax prosecution. She retains an attorney, not a CPA, because there is an attorney client privilege against disclosure of past crimes with an attorney, but not with a CPA. The attorney may retain an experienced CPA to do most of the work. Though her attorney, Dr. Lee participates in the IRS voluntary disclosure program. If there is unreported income from these accounts, she will have to file amended returns and pay the tax and penalties on the unreported income. The IRS warns that if Dr. Lee just filed amended returns and did not participate in the voluntary disclosure program, Dr. Lee could be subject to criminal prosecution. If Dr. Lee does participate in the voluntary disclosure program, then Dr. Lee would not pay $80,000, the entire inheritance as a penalty, but 20% of the account or $16,000. Once the IRS has started a criminal investigation, Dr. Lee is no longer eligible for the voluntary disclosure program.

Six Months Window. The voluntary disclosure program ends September 23, 2009; it was started March 23, 2009. “There are no plans to extend the deadline past September 23, 2009”, said Neil Shulman, head of a FBAR Task Force of AICPA, a national association of CPAs.

Get Out of Jail Card. In the board game of Monopoly, you can roll the dice and end up on the square “Go to Jail”. If you should have filed your FBARs and didn’t, your Get Out of Jail Card is about to expire.

Prepare for the Return of the Estate Tax

It’s Coming Back! The Estate Tax is coming back. That is the growing consensus of observers of what is happening on Capital Hill.

$3,500,000 exemption for 2009. This year, 2009, each person has an exemption from federal estate taxes of $3,500,000. This means that unless you have life insurance, real estate, savings and retirements funds in excess of $3,500,000, you do not pay any federal estate tax. If you live in Virginia, you don’t have any Virginia estate tax. But, if you live in DC or Maryland, you have estate taxes if you have more than $1,000,000.

Easy to be a millionaire. For many people, it is surprisingly easy to have an estate over $1,000,000, but difficult to exceed $3,500,000. Let us say you bought a house for $50,000 and it is now worth $500,000. You have a retirement fund of $150,000 and other savings of $75,000. We are talking about someone who considers themselves as middle class and not rich. They also have a small term life insurance policy with a death benefit of $250,000 and another $150,000 life insurance from their work. The death benefit of the life insurance is part of their taxable estate if they die while the insurance is in effect. Under the estate tax calculations with a $1,000,000 exemption, you have a taxable estate of $1,150,000.

Wealthy Escape at $3.5 million. Compare this to Mr. And Mrs. Wealthy. They have $1,000,000 in real estate, $1,000,000 in investments, another $2,000,000 in a family owned business, and insurance of $2,000,000. Their total taxable estate is $6,000,000, but they pay no estate tax when the estate tax exemption is $3,500,000 per person and their living trusts both use their $3,500,000 exemption (Two times $3,500,000=$7,000,000 which is greater than $6,000,000).

Bush Taxes Cuts Expire. The $3,500,000 exemption is part of the phase out of the estate tax under the Bush tax cuts. Next year, there is a complete elimination of federal estate taxes. But at the end of 2010, the Bush tax cuts expire. Rumors are that at the end of 2009, Congress will extend the $3.5 million exemption for only one year, through 2010. Without further legislation, the exemption automatically goes back to the $1,000,000 exemption in 2011 with rates as high as 55%.

$3,500,000 Was Here to Stay. President Obama’s election platform included a promise to keep the exemption at $3,500,000 and he implements his promise in his budget assumptions for future years by use of a $3,500,000 exemption. Earlier this year, I and many people who follow developments in Congress predicted that Congress would extend the $3,500,000 exemption for years to come. Most estate tax commentators saw the $3,500,000 exemption as the logical answer.

Impact of New Spending. What has changed so soon? Look at some numbers from the Heritage Foundation report of July 2009:

*Spending Surging. Spending and deficits are surging at a pace not seen since World War II.
*$33,932 per household. Washington will spend $33,932 per household in 2009 which is an increase of $8,000 from 2008.
*2008 Deficit $466 B. Federal spending was $3,031 billion in 2008 with a deficit of $466 billion.
*2009 Deficit $1,845 B. Federal spending in 2009 will be $4,004 billion with a deficit of $1,845 billion.
*Large Deficits Through 2019. Federal Spending is projected to continue to exceed revenue by a large gap through 2019.
*32.1% Jump in 2009. Federal spending grew by 4.9% in 2008 and by 32.1% in 2009.
*Spending Will Stay High for 10 years. President Obama’s budget proposal has per household spending at $33,392 in 2009 and ten years later in 2019 at $33,312, indicating a continuing high level of spending.
*Annual Increase is 8%. Since 2001, spending has increase at an average annual rate of 8%. If this rate continues for the next ten years, there will be massive requirements for new revenue.
*Social Spending To Consume All Taxes. By 2050, spending just for Social Security, Medicare and Medicaid will consume all of the federal taxes that the federal government usually collects as a percentage of the economy.
*Massive Tax Increases Needed. To just pay for Social Security, Medicare and Medicaid, taxes will have to increase from less than $1000 per household in 2010 to $3,000 by 2020 and over $12,000 per household by 2050.
*Spending Increases without 2009 Problems. This spending is not temporary and will continue to increase even without the global war on terror, the 2009 financial bailouts and the 2009 stimulus bill.
*Popular Programs Rapid Increase. Spending on popular programs is growing rapidly.
*Education up 169%. K-12 spending has surged 169% since 2001.
*Veteran Spending Doubled. Veteran spending has doubled since 2001.
*Medicare up 68%. Medicare Spending has jumped 68% since 2001.
*Interest Will Consume 2/3s of Deficit. By 2019, net interest costs will be two thirds the size of the entire budget deficit.

Looking for Found Money. Congress is considering cap and trade and health care legislation which involve large tax increases. There is a major search by Congress through the tax code for ways to pay for desired projects and plans. Most plans target the “wealthy” for increased taxes.

Do Nothing and Get an Automatic Tax Increase on the Rich. An obvious target: Do nothing, and by law, the exemption for estate taxes will be $1,000,000 with rates as high as 55% in 2011. The estate taxes do not generate much revenue, but given what is happening, even a few measly $100 billion extra here or there might help pay for parts of a few programs.

Did Julia Childs Change America?

Julia Childs changed my America.

Growing up in Columbus, Ohio in the 1960s, I lived a peaceful, unexciting and efficient life. For dinner we ate meat and potatoes, heavily cooked vegetables and the all American apple pie. Once, my father cooked a can of El Paso enchiladas, I considered that exotic. When my father served lasagna to his Ohio music camp high school students, he found that they had never eaten this before. If you went to a local coffee shop for breakfast it would consist of over easy eggs, white buttered toast and regular American coffee. Fish was mainly fried; if it was fresh it came from Lake Eire which contained unhealthy levels of mercury. There were a few expensive French restaurants; nobody I knew went to them. The height of spending and elegance was a shrimp cocktail at a nice restaurant.

When I traveled to Europe for the first time at age 19, I had fish and chips in London; as a Midwesterner, this was entirely new to me. I ate onion soup and snails at small cafes in Paris and ate my first quiche. In Florence I ordered the mysterious cappuccino in Italian cafes. I had an exotic tomato and cucumber Greek salad at the Plaka in Athens and paella in Madrid. When I came home I was thrown back into the world of plain, ordinary foods. At the time, these foods were not available in Columbus, unless you made them yourself.

Fast forward to today in America. Cappuccino is found in 7-11’s and there’s a Starbucks on every corner, and even in supermarkets. In the Washington DC area, every national cuisine has its own restaurant: Afghani, Brazilian, Iranian, Lebanese, Ecuadorian, Cuban, Ethiopian, Peruvian, Mongolian, Serbian, and Thai. Even learning to cook is easier than ever with a whole cable channel devoted to cooking, The Foodnetwork channel, and many competitive cooking shows. For quick guides of “how to” you can simply turn your computer on and YouTube has cooking lessons and recipes from around the world available at your fingertips. America has pioneered “fusion” cuisine blending French and Vietnamese and many other world cuisines.

On my more recent trips to Italy, I discovered that you could get a truly awful meal in some Italian hotels. Many restaurants had similar menus with mediocre performances. I yearned to be back in the Washington area where I could get a better meal and for less than half the price because I knew where to go. You can now eat as well or better in America as you can anywhere in the world.

Why this enormous change in a generation?

When lanky, frumpy and nearly nerdy Julia Childs hit the TV screen with her 60s debut on how to cook French food, it changed cooks all over the country. French cooking was thought to be nearly impossible for uncouth Americans, until she came along. If this somewhat silly and sometimes pompous woman could make boeuf bourguignon or onion soup, well I could to. I remembered the delectable food in France and wanted a little taste of France in my own home.

Grocery stores started to carry real French bread, something that is so common place now that we have forgotten that in most parts of the country in the 60s you could not get hard crusted French bread. Now the local supermarket has expanded even further to “Artisan Breads” of great variety, heavy crusts and robust flavors.

We didn’t notice that Julia Childs worked for the OSS, the predecessor of the CIA, for years in the US and abroad. She attended the famous Le Cordon Bleu cooking school in Paris learning and teaching cooking while her diplomat husband worked for the US Information Agency.

Childs was no “info babe” and may not have made it in today’s glamorous world of TV. She did not have a band or an audience and if humorous, it may not have been intentional. She was often the subject of parodies. She reinvented herself in her fifties and became a national celebrity over something as frivolous as the taste of food.

She treated good food and wine as an important part of life in a country where we did not want to waste three hours to prepare one dish. She made the mysterious ways of French cooking fun and something that could be mastered by the “average Joe”. She freed the fifty five year old house wife to join the 60s revolution and smell the flowers – or at least the ragout. Since the 60s, this country has had a cultural revolution in fashion, family structure, and more. Thanks in part to Julia Childs, we now have the greatest variety and quality of food experiences in the world.

Guardian vs. Executors

Agonizing decision. The most difficult decision for most parents is who will take care of their children in the event that the parents have a horrible accident and die before their children are grown. Once made, this decision is set forth in their will as the choice for guardians of their children.

Blended families. This choice has become more difficult now that many families are raising children from a prior affair, from a prior marriage or from their own children. The ex-lover is gone and may have little to do with the children of the blended family. But, if both spouses die, the surviving birth parent will have a priority claim for custody of the children. We discussed the planning options in a recent blog as to how to deter an irresponsible birth parent from obtaining legal custody in: “Who Will Take Care of Your Children If You Can Not?”

Guardian Does Not Control the Money. A touchy problem is who will control the money for the children. There is no legal requirement that the person in charge of your money (trustee or executor) be the same person who has custody of your children. The guardian may be a wonderful care giver – an ideal stay at home mom with a helpful and supportive husband – but they may be lousy money managers, or just unsophisticated. You may have someone else, family member or friend, in whom you trust to judiciously invest the funds and to spend it wisely.

Trustee Controls the Money. You have created a living trust to hold property so as to avoid court process in the event of death or disability, to save on taxes and to provide lifetime asset protection for your children. You have named Susan Surefoot, a CPA and financial wizard, as the successor trustee of your trust after you are gone. Surefoot will administer, invest and distribute the funds for your children if you and your spouse die while they are minors. Your sister Ellen will be the guardian. How does Ellen receive money from Surefoot to take care of your children?

Jackson Mother vs. Jackson Attorney. This issue is currently in contention in the Michael Jackson case. The court has given custody of Michael Jackson’s three children to his mother, Katherine Jackson. Reports are that Katherine Jackson is financially stressed, was financially dependant on Michael Jackson and has been living on her social security since his death. She requested the court to provide her a family allowance and copies of Jackson’s proposed concert tour contracts and challenged the appointment of a Jackson business advisor and an attorney as the executors of Jackson’s estate. The court grated a temporary allowance to Katherine but left the executors appointed by the will in charge of the estate until further hearings. This is an example of how the guardian may challenge the authority of the executors over the administration of the estate.

A Soap Opera. Allen had an affair with Angelina, a rock band groupie. Angelina, deciding Allen was too dull, left him and followed her favorite alternative band, the Dead Toads, around the world. Later, Angelina said she was pregnant with Allen’s child, to be named Toadie Patty. Angelina became a drug addict and abandoned Toadie at birth. Allen picked up Toadie at a hospital in Kathmandu, Nepal and raised him as his son. Later, Allen met Rachel, they fell in love, got married and had two children of their own, Erica and Eric. They became a loving and blended family, with Erica, Eric and Toadie all behaving as part of the same family.

Guardian vs. Trustee. Allen and Rachel designated Mary, Allen’s sister, who is successfully raising her own three children with her husband, a leader of a Mega Church in McLean, Virginia. But, reports are that Angelina has gone through drug rehabilitation twice and became a convert to a new age religion. Allen and Rachel may never be able to defeat a claim for custody by Angelina, the birth mother, but want to make sure that Allen’s brother, Aaron, a successfully financial planner, will handle the administration and investment of the funds of the estate of Allen and Rachel in case Angelina wins custody of Toadie.

How will Allen and Rachel navigate these stormy waters?

1. Put responsible people in charge of the money. Aaron will be the successor trustee of the Allen and Rachel trust and therefore have control of the money. Without pursuing a difficult and expensive law suit, the court will not have automatic jurisdiction over Aaron, as the court does with a will, and substantial proof of mismanagement will have to be clearly established for the court to remove Aaron or interfere with Aaron’s management of the trust assets.

2. Have the Trustee pay the bills. The trust gives the power of Aaron to pay the bills directly for the care, education, health needs, clothes and other expenses of Toadie. Angelina can not siphon off the funds to buy drugs.

3. Establish an allowance. Set forth in the trust how much is to go to Angelina directly to spend on Toadie.

4. Have the trust own the house. The trust can buy a house for Toadie and Angelina to live in and it is owned by the trust and not Angelina.

5. Fund monitoring of care. Authorize the trustee to use trust funds to find out how well Angelina is taking care of Toadie and to take court action to remove her as guardian if she is abusive to Toadie.

6. Allow discretion. Angelina may become a great mother, having learned from her mistakes. Give discretion to Aaron to help Angelina with her expenses of bringing up Toadie.

7. Alternative Rules. Provide an alternative set of rules if Angelina is not awarded custody of Toadie and Toadie stays with Erica and Eric and is raised by Mary and her husband.

8. Trust Protectors. Provide a committee of family members who are “Trust Protectors”, with the sole power to remove the trustee and appoint a replacement. You never know: Aaron may abandon his job as a financial planner to follow his passion for cooking after he wins the contest as the Next Food Network Star.